The Innovator's Solution

Why you should modernize your spare parts planning

There’s untapped cash and profits in your spare parts business. Aftermarket parts is a big net margin producer for many manufacturers, and yet service levels and inventory in these operations are often woefully sub-optimized (See CapGemini statics above).

A recent in depth study from McKinsey analyzed 30 industries and found that average earnings-before-interest-and-taxes (EBIT) margin for aftermarket services is 25 percent, compared to 10 percent for new equipment. (“Industrial aftermarket services: Growing the core”, July 2017). An extra 15% of margin is a big opportunity.

But despite the sanguine outlook, too many manufacturers still view their aftermarket businesses as their ‘poor relations’, neglecting to give these businesses the technology and infrastructure they need to thrive.

Some hesitate to focus on aftermarket for supply chain planning because it can seem just too hard. Spare parts businesses face the double whammy of complex multi-echelon distribution networks and lots of slow moving, long-tail items. But it’s these very traits that make these businesses most likely to gain from modernized supply chain planning.

In my day-to-day work with customers, I get to see close up some of the remarkable transformations that take place following well-placed investment in supply chain planning. Aston Martin, for example, became an earliest adopter of AI technology, using it to segment inventory into seasonal clusters and devise much more intelligent replenishment policies that ended up slashing inventory value by 18 percent while raising service levels.

More recently, I learned about an automotive parts supply chain based in Israel, Lubinski - an established family business that’s the sole importer for Citroen and Peugeot vehicles. This business had no ‘burning platform’ to modernize, as it was profitable. But at its local technology partner’s urging, it upgraded to a modern planning system to optimize its inventory of roughly 20,000 parts, of which 75 percent were slow-movers.

Today the company is saving 25 percent on inventory costs, ordering a third less in rush orders by air, and saving considerably on waste and obsolescence. Super slow movers are now make-to-order. All of this is happening while maintaining well above average service levels of 95-96 percent, which are tuned to the needs of each product. Last year the company returned an extra Euro 1.5 Million cash to the company’s bottom line, solely from inventory savings.

Productivity gains have been very impressive as well. Instead of needing two people full-time on planning, the system is almost completely ‘self-driving’. One person spends part of one weekday managing the process and both are now freed to engage in more valuable, customer-facing work. The only lament from the spare parts planner on the eve of his retirement was “I really wish we had done this sooner!”

The bottom line is that from large scale implementations at public companies like global leader Lennox Industries to smaller family businesses like the Israeli car importer, optimizing planning always delivers cold, hard cash to the business along with productivity gains and higher service levels.

And modernizing your spare parts business to improve service levels also drives more revenue from customers who might otherwise go elsewhere. Attractive margins in spare parts are drawing new players into the aftermarket game. For instance, last February Amazon announced that it was spreading its tentacles into automotive aftermarket parts, offering same day delivery. So getting your spare parts business right even helps build competitive barriers to keep new entrants at bay.

Every day you wait to optimize your spare parts supply chain is another day of lost profits and a range of benefits to your company and your customers. Make it your new year’s resolution to modernize.